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Jokes About Private Jets and ‘Breaking Bad’ Schemes Haunt PE Firm in Suit

Jokes About Private Jets and ‘Breaking Bad’ Schemes Haunt PE Firm in Suit

(Bloomberg) -- As the private equity firm Sterling Partners LLC prepared to market a 2015 equity offering for Adeptus Health Inc., an emergency room operator Sterling partly owned, insiders joked about the deal being lucrative enough to buy them a private jet.

“No doubt in my mind that it will be a successful trip,” Daniel Rosenberg, co-head at the time of Sterling’s health care practice, wrote to Thomas Hall, who was chief executive officer at Adeptus. “Only question is if you want red stripes or blue and yellow on your plane,” according to email excerpts included in a court filing.

Less than two years after that banter, Adeptus was bankrupt. Now, Sterling affiliates and former Adeptus managers are being sued by a trustee for Adeptus’s estate for allegedly crippling the business in pursuit of their own gains. According to a complaint filed in Delaware May 17, the company’s owners spurred its collapse through a mix of self-dealing and aggressive growth, netting an “obscene windfall” at Adeptus’s expense.

The defendants named in the suit haven’t yet filed a response, and a representative for Chicago-based Sterling said the firm doesn’t comment on pending litigation.

Breaking Bad

In aggregate, Sterling extracted more than $641 million from Adeptus before it entered Chapter 11, according to the trustee’s filing, while its initial 2011 investment was about $57 million. The complaint was submitted by the Adeptus estate’s litigation trustee, an entity assigned to pursue outstanding legal claims on behalf of the company while its new owners navigate a post-bankruptcy turnaround.

“By pitching the Adeptus enterprise as a promising growth company and through financial statement engineering, Sterling and the insiders were able to take the company public and sell large chunks of their positions in a struggling business before the house of cards they built collapsed,” according to the complaint.

Representatives for the trustee, Drivetrain LLC, didn’t respond to requests for comment. For its part, the Sterling-controlled company said at the time of its bankruptcy that a sharp increase in competition among freestanding emergency rooms was a contributing factor to its financial collapse.

“The facilities within the Adeptus enterprise compete with a number of other emergency care providers,” the company’s chief restructuring officer reported in its bankruptcy filing, and “Adeptus experienced a steady decline in patient volume.”

The Delaware complaint targets individuals and entities affiliated with Adeptus and Sterling, highlighting the roles of a handful of named defendants. Email excerpts in the trustee’s filing show them joking about the quality of champagne they’ll serve aboard their planes and comparing the tax-advantaged -- and legal -- “Up-C” initial public offering structure they used with a money-laundering scheme featured in the television show “Breaking Bad.”

In the show, the “protagonist and his wife bought a car wash as a cover business to launder their methamphetamine cash,” Rosenberg wrote to Hall ahead of the IPO in 2014. “Almost as effective as an Up-C structure,” he said, adding a smiley face.

Litigation Trust

Hall, who is no longer with Adeptus, and Rosenberg, who left to found is own firm, RiverGlade Capital, didn’t respond to telephone and email messages seeking comment. The complaint doesn’t allege money laundering on the part of the defendants, nor does it indicate the actual purchase of planes.

Adeptus filed for bankruptcy protection in April 2017 in Texas with a plan to be taken over by Deerfield Management Co., another private equity firm focused on the health care sector. It continues to operate under the same name.

In its bankruptcy petition, the Lewisville, Texas-based company said Adeptus and its affiliates constituted the oldest and largest network of freestanding emergency rooms in the U.S, with more than 100 facilities concentrated in three states.

As a part of its reorganization in bankruptcy, Adeptus set aside cash in a litigation trust, controlled by an independent trustee, to pursue claims Adeptus and its minority investors may have against its former directors and owner.

Such trusts assume the legal claims of stakeholders in a bankruptcy in a way that’s independent of the restructuring, in order to minimize delays on the company’s emergence from Chapter 11.

The case is Drivetrain LLC v. Thomas S. Hall, 2019-0365, Delaware Chancery Court (Wilmington).

--With assistance from Steven Church.

To contact the reporter on this story: Eliza Ronalds-Hannon in New York at eronaldshann@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Boris Korby, Nicole Bullock

©2019 Bloomberg L.P.